Underlying Action Continues to Wilt

I reviewed the charts on my watch lists this weekend and noticed action around key moving averages -- specifically, reversal candles at or near the 50-day line -- as the dominant theme. I have often elaborated on my concerns about impending broader-market weakness in May, using a series of technical indicators in the S&P 500, and now I want to present one more. This one illustrates the relationship between the index and the percentage of stocks in the index that are above their 50-day moving averages, prior to the May 2012 decline and today.

S&P 500 vs. Stocks Under 50-Day MA Source: StockCharts.com View Chart » View in New Window »

The most obvious comparison is that, in the three months prior to May of last year, while the S&P was making new highs, the percentage of stocks above their 50-day lines was declining. This is a bearish divergence that represents narrowing market leadership, and we have been seeing the same thing happen since February of this year. The market is continuing higher, but the number of stocks above their 50-day averages is declining, with the ratio currently near 60% -- which, in the past, has represented a key inflection point. I think the broader market will attempt to make a new swing high this month and fail, but in the meantime there are short-term opportunities on the long side....166 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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